Can a business insure itself against internal conflict?
From public liability to premises insurance, the commercially sensible option of ensuring you’re covered in case of unexpected external damage to the business is difficult to argue against, especially if you’re looking to exist in the long-term.
But with this, there’s often an unfounded assumption that disputes and threats will come solely from outside the company. Unfortunately, this isn’t true.
For instance, is there a clause in any of the insurance polices you have that protects the business from:
- A majority shareholder unexpectedly deciding to sell their stake in the company to an unknown party?
- The development of mistrust amongst shareholders and those ‘unwritten’ rules starting to vanish?
- Growing tensions as to who is or isn't pulling their weight?
- Disagreement relating to dividends and "perks" from the business?
- Uncertainty regarding the different rights of directors versus shareholders in the day to day running of the business.
Yet every single one of the above has the potential to be far more harmful to the company than legal action by a supplier or a burglary at the office.
So, you have a shareholders agreement…right?
A shareholders agreement is one of a few documents a business should have that establishes a framework in which disputes like those above are more peacefully settled, if not extinguished before an issue arises.
“But our ‘unwritten’ rules have worked up to now. We never argue”
Not yet. But when people are put under stress by personal or relationship issues, irrational decisions can be made and work relationships may not always come first. By deciding that you won’t need a shareholders agreement, the future of the business could be one single broken friendship away from failure.
Simple Business Decision
Deciding not to have a bespoke shareholders agreement drawn up is no less risky than not buying relevant insurance policies.
In the event that no agreement exists, the costs of litigation can build up to significant levels that potentially threaten the business’ future. The existence of an agreement avoids this.